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We're IRA Underachievers

When it comes to college basketball fandom, hot dog-eating contests, and entrepreneurial spirit, we're a nation of overachievers, but our record for contributions to certain retirement plans could use some serious improvement.

Only 4% of workers contributed to either a traditional IRA or a Roth IRA in 2003, according to Internal Revenue Service statistics recently compiled by the Congressional Budget Office. If that statistic seems a little old, keep in mind that there's not a lot of evidence to show that we've improved our savings habits over the last few years.

We're not maxing out our contributions, either. On average, in 2003, the report found that contributors put an average of $1,898 into a traditional IRA and $1,815 into a Roth IRA.

Before we go any further, know that not every single person should contribute to an IRA. If your employer offers a generous 401(k) program with fabulous investment options, you may be best served by stashing your retirement money there. IRAs, like many other gifts from Uncle Sam, also come with some strings attached. The benefits may not seem so great, or you may not be eligible to participate at all, depending on your income and age.

To make sure you're not overlooking a great opportunity, however, let's remind ourselves of some reasons that IRAs can be the ideal place to establish and grow a nest egg for your retirement.

Tax advantagesIRAs come in two forms, with two different tax advantages. If you qualify for either, they can mean hefty savings on your IRS bill.

Depending on your income, you may be eligible to deposit money into a traditional IRA and then take a tax deduction for your contribution. You avoid paying taxes for years, even decades. While you must pay tax when you withdraw the money, you can take some solace in the fact that you enjoyed years of tax-deferred growth in the meantime.

If you'd prefer to pay now rather than pay later, then a Roth IRA might be for you. You won't get a tax deduction for any deposits you make, but you'll never pony up another dollar to the IRS as long as you follow the rules. That means your earnings compound tax-free, and you keep all the proceeds. Both options help you make the most of the time between the day you make your deposit and the day you need the money to finally take that retirement cruise through Scandinavian fjords.

Let's assume, for example, that you deposited $4,000 -- the maximum permitted this year for those under 50 -- into a Roth IRA today and left the money alone for 30 years. If you invested your $4,000 in an equity index fund that tracked the S&P 500 and the index kept up its historical performance of returning about 10% every year, you would have $69,798 to spend traveling any place you want. That can buy a lot of souvenirs.

Withdrawal limitationsUncle Sam really wants you to save for retirement, so he makes it hard for you to get at the money you deposit into an IRA. That can be a good thing, forcing you to keep your mitts off the dollars that will later pay for your shuffleboard and bingo. However, it can deter some would-be savers from tying up their money. For those people nervous about putting a significant sum of money behind lock and key, you should know the exceptions to the rules against making early withdrawals from your IRA.

If you contribute to a Roth IRA, you can take back your original contributions at any time without penalty and without paying taxes. You can't necessarily take out your earnings, however.

If you contribute to a traditional IRA, the rules get stricter. Under most circumstances, you'll have to pay a penalty if you take your money back too early, but there are exceptions designed to help out savers who suddenly find themselves in an unforeseen financial emergency. Among those exceptions, you may avoid penalties if you face unreimbursed medical expenses that exceed 7.5% of your income for the year, make a down payment on your first home, or need to pay for higher education.

FlexibilityUnlike a workplace retirement plan, which often limits your investment options to a handful of mutual funds, you can invest your IRA money in almost anything. If you like mutual funds, you can pick any one you want. If you're looking to start buying individual stocks, then the whole universe of public companies is open to you. Even big, well-known companies can deliver great returns over time. From solid dividend payers like Coca-Cola (NYSE: KO) to promising growth companies like Whole Foods (Nasdaq: WFMI) , you can buy whatever you want in an IRA.

IRAs are so flexible that you can even keep depositing money after the year has ended, all the way up until the deadline for the year's tax return. That means you've got another week or so to make your contributions for last year. How's that for overachieving?

Find out more about IRAs of all stripes at the IRA Center. Also, the Fool's Rule Your Retirement newsletter service wants to help you prepare for the retirement you've dreamed of. Advisor Robert Brokamp has solutions for you no matter what stage of life you're in. Take a free 30-day trial today to learn more.

Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article. She welcomes your feedback. The Motley Fool has a disclosure policy.

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